Mosaic, CF Industries lead fertilizer sector rally

SAN FRANCISCO (MarketWatch) — Shares of Mosaic Co. led a rally in fertilizer stocks Friday, rebounding to trade among the gainers on the S&P 500 Index after a four-session decline of more than 12%.

The sector recovered after suffering a hit from reports of a lower natural-gas pricing agreement between Russia and Ukraine that could potentially cut the cost advantage for fertilizer producers in North America, as well as recent weakness in corn futures.

“A spike in U.S. natural gas costs or a decline in Ukrainian gas costs would reduce the competitive advantage that U.S. producers enjoy as high-cost Ukrainian natural gas sets the floor price for imported nitrogen products,” said Edlain Rodriguez, an analyst at Lazard Capital, in a note dated Thursday.

Natural gas is used to make nitrogen-based fertilizers, so the cost of the energy source directly affects the cost to make the fertilizer.

Rodriguez initiated coverage on the sector with a bullish view and some analysts downplayed the impact the Russia-Ukraine natural gas agreement would have on the North American fertilizer producers, providing a boost to fertilizer shares Friday.

Charles Neivert, managing director at Dahlman Rose & Co., said Thursday’s news of the lower natural gas price agreement created a “knee-jerk,” and possibly an “ill-formed” negative reaction in shares of Agrium and CF Industries, in particular — both of which are more leveraged than most of their peers in the sector to the nitrogen market.

“Ukraine is a major producer and exporter of ammonia and urea,” he said. And the price cut represents a significant decrease in cost to Ukraine, “a relatively high cost producer, perhaps creating a scenario for price and margin declines and significant excess capacity in the marketplace.”

But taking a closer look, Neivert said the price cut to $225 per thousand cubic meters from $400 per thousand cubic meters represents a drop to $6.40 per million British thermal units from $11.33 per million BTU.

And “even with the decline, Ukraine would still be a much higher cost nitrogen producer” than CF Industries or Agrium, he said.

King corn

Meanwhile, the fertilizer sector hinges on developments in the corn market, said Darin Newsom, a senior analyst at Telvent DTN.

“Corn is the king of agricultural markets,” he said. “If corn is going up, all industries tied to agriculture will likely be strengthening as well, including fertilizer.”

He added: “If corn is going down, stock analysts and traders may see it as a sign of potential problems for fertilizer companies if U.S. producers decide to cut back on fertilizer purchases in the coming year.”

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